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FCA clarifies advice definition as it launches consultation

FCA clarifies advice definition as it launches consultation

The FCA has sought to clarify the boundaries between different investment advice models as it launches a guidance consultation.

The regulator found that firms are being clear on the requirements for full advice and execution-only business post the introduction of the retail distribution review (RDR) in January 2013. However, they are struggling to navigate the options in between full advice and execution-only. For example, simplified advice or limited advice services and sales where personal recommendations are not made but involve guiding the client in some way.

The FCA said that for advice to be regulated at all, it must relate to a specific investment and must be given to the person in their capacity as an investor or potential investor, or as an agent for an investor or potential investor. It must also relate to the merits of them buying, selling, subscribing for or underwriting the investment.

If it does not have all of the following characteristics then it is generic advice and is not regulated, the FCA concluded, citing the following examples:

- Advice to a customer to buy shares in ABC plc or to sell Treasury 10% 2014 stock is advice about a specific investment and so is regulated.

-Advice to buy shares in the oil sector or shares with exposure to a particular country is generic advice because it does not relate to a specific investment.

-Advice on whether to buy shares rather than debt is generic advice and is not regulated.

-General advice about financial planning is generic advice and is not regulated.

-Guiding someone through a decision tree where they make their own decision, would not normally be advising on investments.

Boundary between information and advice

The regulator noted that the difference between ‘information’ and ‘investment advice’ is the element of opinion or judgement on the part of the adviser, either in person or, for example, online. Regulated advice involves recommending a course of action or making a judgement on the merits of exercising a right, for example to sell or buy.

The FCA advised that generally if information is given to a client and nothing more, this does not involve giving regulated advice.

For example, giving facts about the performance of investments, the terms and conditions of investment contracts, or the price of investments, does not involve regulated advice if the investor is left to exercise their own opinion on the action to take.

However, adding complexity to the issue, it said the circumstances in which information is provided can make it regulated advice.

For example, if information is provided on a selected rather than balanced basis so that it influences or persuades, this may be regulated advice.

If, for example, share price information is given in circumstances which suggest that the firm is communicating that it is a good time to sell, then what appears to be the provision of information may, in fact, be advice.

Providing definitive guidance on whether something is regulated advice depends not only on the facts of the individual case, but also the context, the regulator noted.

Personal recommendations

The FCA clarified that an adviser is giving a personal recommendation if these three elements are covered:

-          A recommendation is made to an investor or potential investor, or someone acting as an agent for an investor.

-          The recommendation is presented as suitable for the person

-          The recommendation must relate to taking certain steps in respect of a particular investment

The FCA noted that a firm may provide a recommendation in the form of an investment bulletin that is not targeted at individual customers without it constituting a personal recommendation and therefore triggering the suitability requirements. However, this could still amount to regulated advice.


If a personal recommendation is given, no matter what form, the FCA stressed suitability requirements and the need for firms to obtain information from the client to understand they have a 'reasonable basis' to believe the following:

- The recommendation meets their objectives;

-The client can financially bear any related investment risk consistent with their investment objectives;

- They have the necessary experience and knowledge to understand the risks involved.

Meeting suitability requirements is necessary even if a personal recommendation is provided through a simplified advice process.

'However, it is important to note that the suitability requirement is flexible and allows firms to develop a simplified process dependent on the product and type of customer for which it is intended. For example, the suitability test is qualified by reference to ‘the nature and extent of the service provided’, and the information that must obtained is qualified by the condition ‘where relevant’. The information that it is ’necessary’ for a firm to obtain will vary from cases to case. The more complex and high risk the product, the higher the threshold of required information,' the FCA said. 

The announcement comes as the watchdog said it was aware that firms offering retail investments without personal recommendations would like greater clarity on how they can support customers in making informed decisions, increasingly via technology, without stepping over the boundary into providing a personal recommendation.

Following the introduction of the RDR, the financial watchdog noted the introduction of concerns about the availability and accessibility of personal recommendations to some clients. As a result it said it will monitor this through the year, having recently conducted a large scale piece of quantitative customer research, looking at customers’ interactions with the retail investment market before and after the introduction of the RDR.

The research, found that there had been a small shift from sales channels that involved the giving of a personal recommendation to those that did not (2% of the overall research sample had moved). However, there has been a slightly greater move from channels not involving a personal recommendation to those that did, equating to 4% of the overall research sample).

‘This suggests that the picture is far from straightforward,’ the FCA noted.

As a number of newcomers have sought to plug a post-RDR advice gap, the FCA said it wants to ensure that low cost models designed to meet this need deliver good outcomes for clients in a way that is also commercially viable for those who supply the products and services.

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